Aerojet Rocketdyne Holdings Inc (AJRD) 2001 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and we appreciate your patience. Your conference will begin shortly. Please continue to hold. Thank you.

Ladies and gentlemen, thank you for standing by, and welcome to the GenCorp fourth quarter full year earnings conference call.

At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. Instructions will be given at that time. If you should require any assistance during this conference, please press zero, then star.

As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, President and Chief Executive Officer, Mr. Robert Wolfe. Please go ahead, sir.

Thank you for joining us today to discuss fourth quarter and full year 2001 earnings. I will also discuss in this review the review just completed of certain accounting issues within our GDX Automotive segment and resulting financial restatements announced earlier this morning in our earnings release.

On the call with me this afternoon is GenCorp's Chief Operating Officer, Terry Hall; Yasmin Seyal, Senior Vice President of Finance and acting Chief Financial Officer; Anderson, Deputy General Counsel and Assistant to the Secretary; and Rosemary Younts, Senior Vice President of Communications.

I have prepared some comments I'd like to make, and then we can open the call to any questions that you have. First, I'll ask Rosemary to provide our forward-looking statement.

During this conference call, GenCorp's management team may make forward-looking statements as encouraged by the Private Litigation Reform Act of 1995. All statements in this conference call and in subsequent discussions, other than historical information, are forward-looking statements.

These statements represent management's current judgment on expectations for future operations. A variety of factors listed in the forward-looking statement section of management's discussion and analysis in the company's form filed with the SEC could cause business conditions and actual results to differ materially from those expected by the company or expected in our forward-looking statements.

A replay of today's conference will also be available through March 14th and the call audio broadcast on GenCorp's Web site.

Thank you, Rosemary.

Now looking at the fiscal - full fiscal year 2001, income from continuing operations was $128 million, or $3 per diluted share, as compared to income from continuing operations of 52 million, or $1.23 per diluted share for fiscal year 2000.

Earnings included a number of unusual items, the largest being a pre-tax gain on the sale of the Aerojet Electronics and Information Systems business, as well as restructuring charges. All of these unusual items contributed $1.58 to earnings per share.

Revenues for the full year were 1.49 billion, up 42 percent from revenues in 2000. Segment operating income for the full year, excluding unusual items and restructuring charges, was 113 million versus 119 million in 2000.

For the fourth quarter of 2001, earnings per share were $2.47 compared to earnings per share of 14 cents for fourth quarter 2000. Excluding unusual items and restructuring charges, earnings for the fourth quarter 2001 were 51 cents per diluted share.

Revenues in the fourth quarter increased to $367 million from $277 million in the prior year's fourth quarter. Segment operating income, excluding unusual items and restructuring charges, was 43 million versus 29 million in the fourth quarter of 2000.

Overall, the year 2001 was a transitional year for the corporation. Our attention was focused on major cost and structured changes throughout the company and positioning our businesses for growth and improved performance in the future.

While our GDX Automotive and Aerojet Fine Chemicals segments had disappointing performance, we implemented major restructuring changes in those segments that we believe will lead to significant profit improvement. However, I'm very pleased with the 2001 performance of our aerospace and defense segment, Aerojet.

During the year, Aerojet's Sacramento operations won over 15 new contract awards. We expect growth of revenues and operating income to be in the double digits for Aerojet this fiscal year.

We also made substantial headway involving our real estate business. I'll talk more about segment restructuring actions and what I consider to be the primary highlights of the year in a few moments.

But first of all, let me address the disappointing event that impacted an otherwise successful year - the review of accounting issues within GDX Automotive that resulted in our restatement of financial information.

At this time, I would like to apologize to our shareholders. We have not been able to communicate to you openly about the events surrounding the restatement until we completed our review. The laws simply did not allow us to do so. But we can talk more about it now.

This review commenced in January immediately after we became aware of a certain potential accounting issue - accounting issues within our GDX Automotive segment. These revisions were linked primarily to one GDX Automotive plant in North America where it was necessary to correct certain balance sheet and income statement items that were not properly recorded.

The corrections are primarily related to the correction of errors in the accounting for customer-owned tooling, inventory and recognition of liabilities at one of the company's GDX Automotive plants.

The company is in the process of implementing certain enhancements to its financial organization systems and controls, primarily at its GDX Automotive segment in response to issues raised by the restatement and identified by the company's independent accountants as material weaknesses.

As a result of the review, we have restated previously-issued financial statements for the first three quarters of 2001 and in fiscal year 2000 and 1999. The effect of the revisions on net income for the first three quarters, or nine months of 2001 ended August 31st, was $3 million and decreased basic and diluted earnings per share from 59 cents to 52 cents. For fiscal year 2000, the restatement reduces income from continuing operations from 55 million to 52 million and earnings per share from $1.31 to $1.23.

For the fiscal year 1999, income from continuing operations will be restated from 46 million to 45 million and earnings per share from $1.09 to $1.07.

This review was very comprehensive, the scrutiny very rigorous. Addressing the issue in a proactive and meticulous manner was the right and only course of action for this corporation to take. I am now confident that the issue is behind us.

I do want to thank you for your patience during this month-long effort. We felt it was necessary and prudent for us to do this - do this during this time and postpone financial reporting until we reached clear and final resolution.

Now let me turn to what I consider to be some of the more significant highlights of 2001.

Within our aerospace and defense segment, Aerojet, we completed the sale of Electronic and Information Systems business to Northrop Grumman in the fourth quarter for $315 million in cash. The sale enabled the company to reduce debt and, accordingly for Aerojet, allows management to concentrate 100 percent on growth of the missile and space propulsion business in Sacramento.

As I mentioned, Aerojet did an outstanding job during the year and won over 50 new contract awards. This segment's operating profit for the fourth quarter took a significant jump to 45 million versus 23 million in the fourth quarter of 2000, with the inclusion of the gain from the November sale of 1100 acres of property, which was sold to Elliott Homes for future residential development.

While Aerojet worked to strengthen its competitive position, our attention was focused on implementing restructuring actions to reduce costs, increase efficiencies and improve performance across all areas of the company.

Within the Aerojet Fine Chemicals segment, restructured - restructuring was focused on primarily on light-sizing the structure of the business to be in line with production volume. The Fine Chemicals workforce was reduced by approximately 100 positions, with an increase in efficiency of 40 percent.

This downsizing was combined with numerous quality improvement measures. In addition, Fine Chemicals also successfully validated four new products during the year - these products used in treating HIV and cancer.

The business is fast gaining a reputation as a leading manufacturer of compound, which is the highly toxic chemical compound used for these specific drugs' treatment. In addition, the business passed a critical U.S. FDA audit with flying colors.

Sales within the segment were up significantly by 36 percent in the fourth quarter of 2001 over the fourth quarter last year. In late November, we made the business decision to acquire a 40 percent ownership position in Aerojet Fine Chemicals from NextPharma Technologies USA. Our decision was driven largely by NextPharma's shift in focus to the finished product market segment.

Our expertise lies in the manufacture of highly specialized registered intermediate and active pharmaceutical ingredients, not in the final end product. By regaining 100 percent equity ownership, Aerojet Fine Chemicals can now concentrate on those customers and products within its market niche. All of these actions position Aerojet Fine Chemicals for performance improvement.

Restructuring at GDX Automotive during the year was even more extensive, focused primarily on efforts to integrate the international Draftex sealing business that we acquired in December of 2000. Restructuring actions have involved rationalization of worldwide production capacity through the closure of three plants and consolidation of others in both North American and in Europe.

In total, 1300 positions were eliminated within the segment. Restructuring efforts at GDX Automotive did proceed at a slower pace than planned, and as a result, led to additional expense during the year. Higher-than-projected costs were also incurred during the year by GDX Automotive on the launch of the new Ford Explorer platform.

However, with restructuring complete and the Ford Explorer now successfully launched, we are looking for GDX Automotive to begin realizing the synergy's from the Draftex acquisition and expect significant profit improvements in 2002.

Mr. Terry Hall is currently serving as acting President for GDX Automotive. Former President Gray is no longer with the company. And we have started and an active search underway for a new president of the segment.

A restructuring was also undertaken at the corporate headquarters through the offering of a voluntary enhancement retirement program. We expect it to generate significant soft cost savings by streamlining the corporate management structure. This also begins an orderly transition to a new GenCorp leadership team for the new millennium.

Finally, one very significant event occurred late in the year. We received word that federal and state regulatory agencies had approved an agreement that, in addition to modernizing and streamlining, the Aerojet Sacramento Superfund process will carve out approximately 2600 acres of clean land from the Superfund site designation.

This is an exciting step forward in our strategy to evolve our real estate business in order to monetize our valuable property holdings in Sacramento. The carve out property unit, you may recall, is uniquely located along the major Highway 50 corridor in east Sacramento County, a region that is among the top 10 growth and investment communities in the United States.

It is ideally suited and already entitled for office, commercial and light industrial development. The last remaining step in the carve out process is for the agreement to be approved in the U.S. federal district court, which we expect as early as this April.

In anticipation of this approval, I am pleased to announce that the company has hired a real estate professional, Mr. William Purdy, as its new President of Real Estate. comes to us from Transwestern Development Company and Property, where he served as managing director of development, responsible for all aspects of principal development.

Formerly, was the president and chief executive officer with Metropolitan Structures out of Chicago. He has over 20 years of development, project management and marketing experience, and we're very excited about the expertise he brings to our company.

Looking ahead, we are better positioned in 2002 as a result of having completed these various actions. Excluding any unusual items, we expect earnings per share for fiscal year 2002 to be in range of 90 cents to $1. We will be providing additional values when we announce first quarter 2002 earnings later this month.

Now this concludes my comments. We'll open the call now to any questions. ?

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If you are using a speakerphone, please pick up your handset before pressing the number. And one moment please for the first question.

And once again, ladies and gentlemen, for questions, you may press the one at this time.

Our first question comes from with . Please go ahead, sir.

Congratulations on the super quarter. I've got a question about the real estate. The hiring of the gentlemen that you mentioned - does that - should that signify to us that your intent is to be in the development business, as opposed to potentially a sale of the real estate outright?

Yeah. Well, actually, this does not necessarily lead you to think . Our plan is to obviously monetize it in the best way that we can. An outright sale of the property in total probably does not make sense, only because of the tax implications.

We also want to control, to some extent, what development occurs here. The kind of things we would be looking at - this gentlemen would be looking at would be arrangements and those kind of things with major developers in which we would continue to have some sort of hold or some sort of control on what's being developed. And also have a steady income of revenue for years to come from the development of this land.

So it doesn't automatically lead itself either way. But we're looking at an approach that's more on the development arrangement versus outright sale.

Is the - are there still certain elements of the town that are objecting to the carve out? I've read some things in the newspaper recently that suggest that there's still some opposition. Can you elaborate on that?

Well, we have - the local county water and one of the private water companies are still objecting to this. They've objected in every forum that it's been established. When the state and federal EPA regulatory agencies had their hearing, they voiced their opinion there.

The process has continued in spite of that; however, they are still continuing to protest that we be allowed to develop this property without providing, in their mind, a significant water supply for the years to come.

The thing that's not given out very accurately by them is the fact that we - as part of our agreement for a carve out with the state and federal agencies, is that we will provide water for the area - for everything that we have damaged or will damage going forward.

Thanks.

Our next question comes from Jack Howard with Mutual Securities. Please go ahead, sir.

Hello.

Hi, Jack.

Can you comment on where the over pension stuff comes through on last year's numbers? The pension income?

Yeah, Terry'll handle that - Terry Hall.

Thanks.

Jack, it comes through primarily through operations, and you see most of it in the Aerojet numbers. There's also a little - not much - in GDX operations. But that's primarily what our flow is.

Yeah, and I think in the past you said it's like 12 cents a quarter or something like that. Is it still that much?

That 12 cents comes from the change in the pension accounting that was done in 2000.

OK. So in the 92 to a buck for next year, is 40 cents of it pension income? Or is ...

Well, what we're projecting for next year in the terms of pension income is pre-tax of about 39 million, which comes to between 12 and 14 cents a share.

For the ...

For 2000 per quarter.

2002.

Yes.

OK. In the environmental arrangement that you have with the government to reimburse you, is that mostly come through - does that affect the of the businesses?

It affects the revenues instead of showing it up in the revenue line, but it obviously doesn't affect income, because there's no margin on it.

OK. Would depreciation and amortization for 2002 be similar to 2001 - 77 or so million?

Yes, approximately.

OK. And can you comment on what kind of cap ex you expect for next year?

We expect to spend somewhere between , or slightly less than that.

OK. And with all these new contracts in the aerospace side, is there going to be a ramp up of working capital, and will that, you know, affect your capital availability and bank lines and things?

Most of the ramp up in working capital is driven by programs that were already on, which is Atlas V primarily, which'll happen first half of this year. The rest - the rest of the 50 plus contracts that we've won are R&D programs, so they won't - they're cost plus - for costs plus award. So they really won't impact working capital that much.

OK. And when you sold that one piece of land last year - the 1000 acres - what kind - is that - do you get a capital gains tax rate on that or is it a corporate tax rate?

It's going to be a regular corporate tax rate.

OK. And going forward, if you did sell the land, it would be at regular corporate tax rate also?

Yeah.

Yeah, and it's one of the problems with selling land outright. I think our basis on most of the land in the carve out is about $18 an acre.

OK. And outside of the land that's been carved out, or will - is going to be carved out, how much other land do you guys have in Sacramento that you know might be available many years out - if things got cleaned up for development or whatever?

We think that we have in total - right now we have another 1200 acres that are outside of the Superfund site - that are in what we call buffer areas. We're also looking at one more piece of land that's approximately 2600 acres that's adjacent to the 1100 acres that we sold in November. And trying to get that out of the Superfund site the next step.

OK. I'll let somebody else as a question. Thank you.

OK. Thanks.

Our next question comes from with . Please go ahead, sir.

Hi, gentlemen.

Hello, how are you doing?

Great. I was wondering on the guidance for '02, what - is that dependent on sales going forward now in real estate?

The answer to that is there's not any large sales in real estate. It's primarily dependent upon the operations of the business.

OK. And what is your debt to capital for year end?

I haven't done the calculation, but we are roughly at 215 million in debt and 300 something in equity - I think three, 0 - we're looking.

OK.

Three, ten.

Three, ten in equity.

OK. And what is your guidance for cap ex in '02?

Twenty seven million or less.

And is that maintenance cap ex or ...

No, that's normal cap ex.

OK. OK. Thanks. Thank you for your time.

Thank you.

And if there are any additional questions, or comments, please press the one at this time.

We have a question from with Kennedy Capital. Please go ahead, sir.

Hello, I just had a question. Can you give us any indication of how the first quarter is going at all?

We're going to announce the first quarter in about two weeks, so I can give you an indication in two weeks.

OK. Fair enough.

We're very close.

OK. Thanks.

Mr. Wolfe, there are no additional questions at this time, sir.

OK. Well, thank you very much. I wanted to thank everyone that joined us today. As we just stated, we will be talking to you again in approximately two weeks with our first quarter earnings release.

Thanks for your patience during this period. We really appreciate it, and it's been very rough on the company, but certainly we've now gone through it, and we once again do apologize for the inconvenience we made for each one of you.

Thank you very much, and good day.

And ladies and gentlemen, this conference will be available for replay after 4:30 p.m. today through Thursday, March 14th at 12 midnight.

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And that does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference service. You may now disconnect.

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